Downturn Fundamentally Changed CU Mortgage Operations, Executives Say

LAS VEGAS -- The economic downturn has forced many credit unions to take a more "real world" approach to their mortgage lending, one that recognizes that the mortgage lending story includes more than loan origination, two credit union mortgage lenders said.

"Everyone wants to be in on the first part of the story, where we originate loans that help happy homebuyers get the homes they want," George Shipman, vice president of real estate lending for the $1 billion California Credit Union, told CU mortgage executives attending a break out session of the American Credit Union Mortgage Association's annual conference. "But this session is about what happens on the other side, when those loans sometimes run into trouble or even go bad. That's part of the mortgage lending story, too."

Shipman, who described his Glendale, Calif.-based credit union as being in one of the states worst hit by the mortgage crisis and economic downturn, was joined in his break out presentation by Robin Simmons, an assistant vice president of lending at the at the $3 billion Desert Schools Federal Credit Union, headquartered in Phoenix.

Both executives described their credit unions as being fundamentally unprepared for the wave of seriously troubled mortgage loans that began to trickle in 2007 and soon came to almost swamp them. Each of them said that their credit union's mortgage programs had not had a mortgage loan-loss mitigation component because they simply had not needed one before.

"The credit union had never foreclosed a property before the crisis," Shipman said. "Heck, we really didn't have experience of mortgage loans being late maybe more than a week or so." Shipman agreed, noting that members in the past had always been extremely conscientious about making their mortgage payments but that had all changed in the crisis. "Now, they don't seem to like us, or at least not enough to pay us," she said, laughing ruefully.

Both California and Arizona experienced among the largest increases in real estate and mortgage prices before the crisis and each has been among the most severely hit by the collapsing real estate bubble and economic slowdown. Both credit unions have their own loans on their books as well as service loans that they had sold in the secondary market.

As of June 2010, NCUA records show that California had almost 1,300 first-mortgage loans on its books worth roughly $362 million and almost 3,400 second mortgages or lines of credit worth roughly $260 million. Year to date, the credit union has written off just over $1 million in real estate loans and recovered almost $790,000. The credit union also has 50 modified first-mortgage loans on its books, worth about $41 million, according to NCUA records, and has modified almost $23.5 million year to date.

NCUA records show that Desert Schools had almost 4,700 first loan mortgages on its books worth just over $680 million, with another roughly 14,500 second mortgages and lines of credit worth roughly $582 million. Year to date, Desert Schools had written off almost $6.6 million in its first mortgage loans and almost $22.6 million in its second mortgages and had not yet reported any recoveries. The CU has 450 modified first mortgages on its books, worth about $87 million and has modified roughly 43 million year to date, the agency reported.

And each institution also services significant numbers of loans for Fannie Mae and Freddie Mac.

Both executives recounted how their credit unions had been so unprepared for the coming wave of troubled loans that they lacked the leadership and staff to handle the changes. Shipman told the meeting that he had been chosen to lead the credit union's loan-mitigation effort after it became clear that he was the only one who had experience with a previous major loan and real estate crisis involving savings and loans in the 1980s and 1990s.

"When they asked if anyone had any experience with the RTC [the Resolution Trust Corp.], and I was the only one who raised his hand, I got the job," Shipman said. The RTC was the organization chartered by Congress to address the assets and problem loans from failed savings and loans during that crisis.

Shipman told the executives that California had chosen to largely use temporary workers that it could specially train for this work. The credit union still viewed those workers as temporary, at least on the scale it had been. He said he decided very early to take loan modification and foreclosures out of the realm of collections and to instead put them in the realm of a specialized unit that would include elements from different parts of the mortgage operations, such as underwriting and certification. He said that California had realized fairly quickly that the CU would have to address loan-modification requests in much the same way as it originated loans.

He also said he took a stance that many saw as being unfamiliar to many credit unions: he moved to foreclosure fairly quickly.

"I believe we have to focus on protecting our credit union," Shipman said. "We don't have to go all the way through the foreclosure process, but starting foreclosure gets the ball rolling and we can always stop it later. In addition, it gives us additional leverage in the process."

He also said that once it becomes clear that a foreclosure is likely, the credit union moves to take control of the property quickly and move it into the hands of a local Realtor who is tasked with getting it sold fairly quickly at as good a price as possible.

Simmons said Desert Schools had not gone with temporary workers but had sought to hire and ramp up training in house to meet the problem. The credit union had run into some problems, however, because at the same time that it was training workers in loan modification work, other financial institutions, including big banks, were doing the same.

"It has been hard sometimes to keep staff," Simmons said. "Right now, for example, I think Wells Fargo is hiring experienced loan modifiers and they are paying very good money," she said.

Simmons said the CU in particular had faced a real challenge in communicating the details of what it can and would do when so many members were calling the credit union for help and questions. "Every time a major program was announced, we would get flooded with calls and as many of you know, the time you spend on the phone with members answering questions is time you are not spending modifying loans."

Both executives strongly endorsed treating loan modifications in much the same way as you treat new loan applications, requiring documentation of income and expense and other loan underwriting data to give the modified loan as good a chance as possible of lasting over time.

Shipman also advised credit unions, especially those who are already in the federal government's Home Affordable Modification Program to use its program approach and documents for loans they own as well as for loans they service. Any financial institution that services mortgages it sold to Fannie Mae or Freddie Mac has to participate in HAMP, where the reporting requirements are extremely heavy, Shipman said, but CUs can use HAMP procedures with their own loans that they have not sold that might need modification.